RL35 


.    .  March,  1922 


SMALL  LOAN  LEGISLATION 

PROGRESS  AND  IMPROVEMENT 


By 
ARTHUR  H. 


HAM 

n 


SECOND  VICE-PRESIDENT  PROVIDENT  LOAN  SOCIETY,  NEW  YORK 

CHAIRMAN    NATIONAL   FEDERATION    OF    REMEDIAL   LOAN    ASSOCIATIONS 

AND  FORMER  DIRECTOR  OF  THE  DIVISION  OF  REMEDIAL  LOANS 

RUSSELL   SAGE    FOUNDATION 


Address  delivered  before  the 

Seventh  Annual  Convention  of  the 

American  Industrial  Lenders '  Association 

Chicago,  September  23,  1921 


DIVISION  OF  REMEDIAL  LOANS 
RUSSELL   SAGE    FOUNDATION 


NEW  YORK,  1922 


Price,  10  Cents 


SMALL  LOAN  LEGISLATION 
PROGRESS  AND  IMPROVEMENT 

THE  small  loan  business  is  an  old  one  in  this  country,  and 
some  of  the  evils  surrounding  it  go  back  to  our  earliest 
records  of  the  business.    It  is  said  that  Abraham  Lincoln's 
first  public  address,  when  running  for  election  to  the  legislature  of 
Illinois,  was  devoted  to  a  discussion  of  the  prevailing  high  interest 
rates  on  small  loans,  and  he  pledged  himself,  if  elected,  to  put 
through  a  law  making  such  rates  illegal  and  punishable.     His 
good  intentions  cannot  be  questioned,  but,  like  many  others  who 
came  after  him,  he  was  acting  upon  insufficient  knowledge  of  the 
subject. 

The  first  real  attempt  to  make  a  serious  and  exhaustive  study 
of  the  subject  before  attempting  a  reform  was  that  begun  by  the 
Russell  Sage  Foundation  in  1907-08,  when  it  financed  preliminary 
investigations  and  publication  of  reports  on  the  salary  and  chattel 
loan  business,  by  Dr.  Clarence  Wassam  and  myself,  then  holding 
fellowships  in  the  Bureau  of  Social  Research  of  the  New  York 
School  of  Philanthropy. 

These  showed  the  business  of  lending  small  sums  on  security  of 
pledge  or  mortgage  of  personal  property  or  the  assignment  of 
wages  to  be  an  extensive  one ;  and  that,  under  the  conditions  which 
governed  it,  a  considerable  proportion  of  borrowers  were  being  ex- 
ploited instead  of  relieved.  It  was  realized  that  the  subject  was 
an  involved  one,  but  as  the  extent  and  manner  of  the  operations 
of  many  of  the  agencies  engaged  in  the  business  were  recognized 
as  an  important  cause  of  poverty  and  distress,  it  came  within  the 
province  of  the  Foundation.  Consequently  I  was  assigned  to  make 
a  further  study  of  the  matter,  and  a  year  later  was  appointed 
Director  of  the  Division  of  Remedial  Loans  which  was  organized 
by  the  Foundation  in  October,  1910. 

The  object  of  the  Division  was  to  conduct  a  campaign  of  public 
education  with  regard  to  the  necessity  for  the  small  loan  business 
as  part  of  our  fiscal  machinery,  and  to  point  out  the  evil  effects  re- 
sulting from  the  operations  of  the  prevailing  commercial  agencies 
in  this  field ;  to  procure  intelligent,  reasonable  legislation  based  on 

2 


a  desire  to  regulate  rather  than  to  annihilate  the  business;  to 
secure  the  enforcement  of  such  laws  and  oppose  the  passage  of 
drastic,  impractical  laws;  and  to  encourage  the  organization  of 
remedial  loan  societies  that  would  make  loans  at  the  lowest  rate 
consistent  with  sound  business  principles  and  a  reasonable  but 
definitely  limited  return  upon  capital. 

These  societies  were  expected  to  provide  such  competition  as 
would  result  in  an  improvement  of  the  methods  commonly  em- 
ployed by  money-lenders,  and  to  afford  an  object  lesson  that 
would  attract  reputable  capital  into  the  business.  It  was  never 
expected  or  hoped  that  the  remedial  loan  societies  would  so  grow 
in  strength  or  in  numbers  as  to  monopolize  the  field.  They  were 
intended  as  experimental  agencies — an  object  lesson — a  stabiliz- 
ing force.  I  know  that  the  Division  was  looked  upon  by  the  loan 
men  as  an  enemy  of  the  business ;  that  they  believed  it  sought  to 
drive  out  the  money-lender  and  monopolize  the  field  for  the  reme- 
dial loan  societies.  It  was  even  stated  that  the  Foundation  was 
seeking  a  profitable  way  of  investing  its  endowment.  Nothing 
could  be  farther  from  the  truth,  but  the  loan  men  were  slow  to 
realize  this. 

We  found  that  usury,  like  profiteering,  is  readily  denounced 
but  not  so  easily  defined  or  prevented.  We  also  found  ourselves 
standing  between  two  groups  or  forces:  one  representing  the 
belief  that  all  loans,  no  matter  how  small  or  upon  what  form  of 
security  made,  should  be  limited  in  interest  to  the  ordinary  bank- 
ing rate;  the  other  representing  the  belief  that  competition  un- 
trammeled  by  law  or  regulation  could  be  trusted  to  establish  in- 
terest rates,  and  that  rates  so  fixed  were  bound  to  be  fair  and 
reasonable. 

The  first  group  consisted  of  a  large  part  of  the  public  which 
had  any  opinion  on  the  subject  whatever,  and  its  views  were  fre- 
quently and  forcefully  voiced  by  newspaper  editors,  legislators, 
and  would-be  reformers,  who  traced  their  authorities  back  to  and 
before  the  dawn  of  the  Christian  Era  and  justified  their  opinions 
by  extensive  quotations  from  the  Bible  and  the  Roman  law- 
makers. The  other  school,  whose  members  professed  to  believe 
that  the  solution  was  to  be  found  in  unregulated  competition, 
consisted  largely  of  high-rate  money-lenders  who  viewed  any  re- 
striction that  promised  to  be  effective  as  an  unwarranted  en- 
croachment upon  their  rights  and  a  violation  of  sound  economic 
law.  They  could  not  trace  their  family  tree  as  far  back  as  the 

3 


first  group.  Their  patron  saint  was  Jeremy  Bentham,  an  econo- 
mist of  the  late  eighteenth  century,  who  gave  birth  to  this  famous 
doctrine:  "If  I  borrow  a  sum  of  money  with  interest  at  100  per 
cent  per  annum  and  can  find  no  one  else  willing  to  lend  to  me  at 
a  lower  rate,  then  the  rate  of  100  per  cent  is  fair  and  reasonable." 
This  is  not  an  exact  quotation,  but  is  substantially  correct. 

The  contention  of  the  first  group — that  banking  rates  should 
govern  small  loans — was  effectively  disproved  by  the  unsuccess- 
ful experiences  of  those  agencies  which  attempted  to  make  small 
loans  at  banking  rates  on  non-fluid  and  non-substantial  security. 
Of  course,  I  know  that  we  still  have  a  chain  of  loan  agencies  in 
many  cities,  organized  to  "lend  to  workingmen  on  their  character 
at  6  per  cent  per  annum"  which  assert  that  they  are  accomplish- 
ing "remarkable  sociological  results."  Suffice  it  to  say  that  there 
has  been  nothing  in  their  experience  to  justify  the  belief  that  small 
loans  can  be  made  at  banking  interest.  Such  a  belief  has  no  basis 
other  than  sentiment ;  and  a  remedial  plan  based  upon  sentiment 
without  regard  to  knowledge  and  experience  has  never  cured  any 
evil,  and  never  will.  Small  loans  are  a  necessity  in  our  present 
state  of  civilization,  and  any  attempt  to  work  unnecessary  hard- 
ship on  the  lender,  or  to  compass  him  about  with  unreasonable  re- 
strictions, has  the  inevitable  result  of  forcing  the  borrower  to  pay 
a  still  higher  charge  than  he  would  otherwise  pay.  If  the  law  pre- 
scribes terms  which  make  it  impossible  to  conduct  business  on  a 
legitimate  basis,  then  both  borrower  and  lender  will  defy  the  law 
and  take  their  chances  on  its  being  enforced.  In  the  end  the 
borrower  always  pays  the  price  in  high  interest  charges. 

The  contention  of  the  second  group — that  determination  of  the 
rate  may  be  left  entirely  to  competition — holds  true  only  when 
lender  and  borrower  are  on  a  substantially  even  footing.  In  large 
loans  secured  by  real  estate  mortgages  or  marketable  securities 
the  law  of  competition  may  have  full  play,  the  rate  being  deter- 
mined by  the  lowest  figure  at  which  money  can  be  secured.  But 
in  the  case  of  small  loans  the  inherent  inequality  of  lender  and 
borrower  vitiates  this  law.  It  can  have  no  basis  except  in  the 
ability  of  the  borrower  to  refuse  the  terms  offered,  if  too  onerous. 
This  the  small  borrower  rarely  can  do.  He  goes  to  the  loan  agency 
as  a  last  resort  and  when  his  need  for  money  is  imperative.  By 
reason  of  this  urgency  and  his  inability  to  get  money  from  another 
source  he  is  in  no  position  to  bargain,  with  the  result  that  the 
lender,  unless  otherwise  controlled,  charges  an  unreasonable  rate. 

4 


At  the  time  the  Division  of  Remedial  Loans  was  organized 
most  of  the  states  were  depending  upon  one  of  the  two  theories,  to 
which  I  have  referred,  to  regulate  the  business,  and  we  spent  much 
time  in  gathering  data  as  to  the  effect  of  such  laws.  I  need  not 
take  up  your  time  this  evening  to  describe  our  investigations,  to 
recount  the  cases  of  rank  extortion  found  to  have  occurred  under 
the  most  drastic  as  well  as  the  most  liberal  types  of  law.  You  are 
doubtless  all  familiar  with  the  conditions  which  we  found  to  exist. 
That  such  laws  were  uniformly  unsatisfactory  in  practice  was 
conclusively  demonstrated,  and  we  determined  to  advance  an- 
other plan  of  control  which,  though  it  could  boast  no  ancient 
lineage,  seemed  sound  and  practical;  that  is,  reasonable  interest 
rates  under  state  license  and  supervision.  This  plan  was  based  on 
recognition  of  the  small  loan  business,  not  as  a  parasitic  growth 
but  as  a  necessary  element  in  our  financial  system,  and  on  desire 
to  attract  into  the  business  reputable  capital  which  should  fur- 
nish the  sort  of  competition  necessary  to  keep  profits  within  reason- 
able limits.  It  was  our  aim  from  the  outset  to  dissociate  the  small 
loan  business  from  the  character  of  some  of  those  engaged  in  it ; 
to  show  that  it  was  the  practices  of  the  loan  sharks  and  not  the 
need  for  loans  that  was  disreputable.  To  educate  the  public  to  a 
realization  that  the  evil  was  inherent  in  the  methods  pursued, 
which  were  more  or  less  a  product  of  the  laws  in  force,  and  not 
in  the  institution  itself,  was  not  an  easy  task.  Our  facts  and  mo- 
tives were  at  first  questioned.  Conscientious  objectors  received 
able  succor  from  loan  men,  who,  perhaps  not  unnaturally,  felt 
constrained  to  oppose  us  as  strenuously  as  they  had  opposed  pre- 
vious interference  from  any  quarter.  If  we  had  been  able  to  con- 
vince the  loan  men  earlier  of  our  good  faith,  the  story  would  not 
have  been  so  long  in  the  writing.  But,  gradually,  as  a  result  of 
speeches,  articles,  motion  pictures,  and  meetings,  defense  of  bor- 
rowers, arrests  and  prosecutions,  and  other  methods  of  propaganda, 
we  began  to  secure  results. 

Following  our  study  of  existing  conditions  and  existing  laws, 
we  drafted  a  bill  which  required  all  lenders  charging  more  than 
the  banking  rate  to  submit  to  license  and  frequent  examination 
by  the  State  Banking  Department.  This  bill  set  up  numerous 
safeguards  for  the  protection  of  borrowers  which  experience  had 
shown  to  be  necessary,  and  provided  adequate  penalties  for  viola- 
tion, with  power  of  enforcement  in  the  hands  of  the  supervisory 
authority.  It  authorized  licensed  lenders  to  charge  on  loans  of 

5 


less  than  $300  an  interest  rate  of  2  per  cent  monthly,  to  be  com- 
puted on  unpaid  balances  as  instalment  payments  were  made, 
with  a  small  additional  fee  to  cover  the  cost  of  drawing  and  record- 
ing necessary  instruments.  A  brief  experience  with  this  law 
showed  the  difficulty  of  safeguarding  the  fee  charge  against  un- 
due repetition  and  indicated  that  the  interest  rate  allowed  with- 
out a  fee  was  insufficient  to  cover  necessary  costs  and  yield  a 
reasonable  profit.  An  alternative  provision  of  a  flat  rate  of  3  per 
cent  per  month  without  fees  was  substituted,  and  in  spite  of  de- 
termined opposition  several  states  were  induced  to  enact  the  bill 
into  law. 

In  the  meantime  the  American  Association  of  Small-Loan 
Brokers  had  been  organized  by  some  of  the  farsighted  loan  men. 
Opportunities  for  contact  and  exchange  of  views  between  them 
and  ourselves  became  more  frequent,  and  then  came  the  epochal 
day  when  a  committee  of  that  association,  consisting  of  Messrs. 
Harbison,  East,  Watts,  Hubachek,  Aufderheide,  and  Colonel 
Hodson,  met  with  Mr.  Glenn,  General  Director  of  the  Foundation, 
Mr.  Hilborn,  Attorney  for  the  Division  of  Remedial  Loans,  and 
myself  in  my  office.  For  three  days  we  debated  the  subject  and 
finally  agreed  upon  a  redraft  of  the  bill  which  was  to  be  known  as 
the  "Uniform  Small  Loan  Law."  The  new  draft,  besides  other 
minor  amendments,  permitted  a  flat  interest  rate  of  3^  per  cent 
per  month  without  fees  or  other  charges.  A  higher  rate  had  been 
proved  to  be  unnecessary;  a  lower  rate  had  proved  insufficient  to 
provide  capital  needed  to  meet  the  demand  for  loans  in  the  small 
cities ;  a  combination  of  a  lower  rate  with  additional  fees  had  proved 
too  susceptible  of  abuse.  The  new  rate  was  based  upon  definite  in- 
formation concerning  the  necessary  costs  of  operation  and  was 
keyed  to  the  business  of  the  lender  of  average  capital  in  the  mod- 
erate-sized cities. 

The  drafted  bill  reflected  a  desire  to  do  justice  to  both  bor- 
rower and  lender.  It  recognized  the  fact  that  small  loan  agencies, 
unlike  banks,  have  no  deposits  and  must  do  business  on  their  own 
capital;  that  their  security  is  not  substantial  or  fluid;  that  small 
loans  on  chattel  mortgage  or  wage  assignment  security  require 
more  investigation  than  bank  loans;  that  instalment  repayments 
necessitate  a  large  bookkeeping  and  collecting  system;  and  that 
reputable  capital  would  not  come  into  the  business  unless  it  could 
see  the  prospect  of  profit  above  the  necessarily  high  overhead 
cost.  The  bill  also  recognized  the  necessity  of  protecting  the 

6 


borrower;  of  seeing  that  he  understood  the  terms  of  the  loan  and 
of  his  contract,  that  he  should  receive  a  receipt  for  all  payments; 
of  providing  a  means  of  recovery  in  case  of  overcharge  and  of 
giving  the  supervisory  power  free  access  to  all  necessary  data  that 
he  might  determine  whether  the  law  was  being  religiously  ob- 
served. 

Of  course,  the  new  bill  encountered  strenuous  opposition  from 
the  public  who  considered  the  rate  of  interest  too  liberal,  and 
from  lenders  who  considered  it  too  low  and  thought  the  law  too 
drastic  in  other  respects. 

I  will  not  detail  the  efforts  made  to  line  up  support  for  the  bill, 
how  social  and  civic  agencies  eventually  came  to  our  assistance 
and  newspapers  rallied  to  the  cause.  No  history  of  the  movement 
would  be  complete  if  it  failed  to  give  large  credit  to  such  agencies 
and  to  the  public-spirited  men  in  the  various  states  who  gave  us 
their  help.  The  time  allotted  will  not  permit  me  to  do  more  than 
refer  to  that  fact.  One  by  one  the  barriers  were  forced  down,  and 
the  striking  fact  before  us  is  that  in  the  short  space  of  five  years 
this  bill  is  now  a  law,  either  in  toto  or  in  large  part,  in  nearly  half 
the  states  of  the  Union,  and  has  fulfilled  our  hopes  and  expecta- 
tions. Its  constitutionality  has  been  definitely  established.  It 
is  being  ably  administered  by  state  officials  who  have  come  to 
have  an  appreciation  of  the  importance  of  the  business,  a  respect 
for  licensed  lenders,  and  a  realization  of  the  earnestness  and  sin- 
cerity of  purpose  of  the  American  Industrial  Lenders'  Association 
and  its  constituent  state  bodies  which  are  striving  to  police  the 
business  and  maintain  it  upon  its  new  and  high  plane.  The  new 
law  has  vindicated  the  belief  that  neither  a  laissez  faire  policy  nor 
coercive  measures  will  cure  the  evil  of  usury ;  that  the  remedy  lies 
in  the  creation  of  something  that  will  facilitate  credit  and  increase 
money  in  circulation  as  well  as  the  means  and  sources  by  and  from 
which  it  can  be  obtained. 

The  law  has  reduced  unnecessary  borrowing  and  lightened  the 
burden  of  the  deserving  borrower.  It  has  reduced  the  losses  of  the 
lender,  legitimatized  the  business  and  those  engaged  in  it.  It  has 
substituted  respect  for  disrepute.  It  has  saved  the  borrowing 
public  from  the  payment  of  excess  interest  running  into  many 
millions  of  dollars. 

In  bringing  about  this  new  and  highly  desirable  condition, 
the  American  Industrial  Lenders'  Association  has  played  a  very 
important  part,  and  it  is  destined  to  play  an  even  more  important 

7 


part  in  the  further  advance  of  the  law  and  the  complete  meta- 
morphosis of  this  once  sordid  business.  I  am  not  going  to  indulge 
in  fulsome  praise  of  your  efforts.  I  doubt  whether  you  yet  deserve 
a  place  in  the  roll  of  fame  beside  the  Christian  martyrs  or  those 
who  have  given  their  lives  in  the  cause  of  humanity.  You  have 
simply  had  the  good  sense  to  recognize  the  right  road  when  you 
saw  it,  the  courage  to  stand  up  and  be  counted  in  favor  of  a  propo- 
sition which  to  the  lending  fraternity  generally  was  anathema, 
the  will  and  determination  to  stick  to  your  declaration  of  prin- 
ciples, and  by  fair  dealing  and  honest  practice  gain  the  confidence 
of  your  clientele,  the  co-operation  of  the  agencies  of  reform,  and 
the  respect  of  the  general  public.  These  I  think  you  have  already 
obtained  to  a  marked  degree  and  will  ultimately  possess  in  their 
entirety  if  you  continue  to  follow  the  course  you  have  charted. 


Photomount 
Pamphlet 

Binder 
Gaylord  Bros. 

Makers 
Syracuse,  N.  Y. 

PAT.  JAN  21,1908 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


